What do central counterparties default funds really cover? A network-based stress test answer
| Autor: | Marco Polito, Andrea Zaccaria, Giuditta Baldacci, Mariangela Rizzo, Andrea Gabrielli, Silvia Sabatini, Giulio Cimini, Giulia Poce |
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| Přispěvatelé: | Poce, G., Cimini, G., Gabrielli, A., Zaccaria, A., Baldacci, G., Polito, M., Rizzo, M., Sabatini, S. |
| Rok vydání: | 2016 |
| Předmět: |
Physics - Physics and Society
Financial network Computer Networks and Communications FOS: Physical sciences Monetary economics Physics and Society (physics.soc-ph) 01 natural sciences FOS: Economics and business Stress test 0502 economics and business 0103 physical sciences systemic risk Systemic risk Clearing 050207 economics 010306 general physics default fund Settore FIS/03 Settore FIS/02 Bond 05 social sciences 1. No poverty Equity (finance) financial network Market liquidity Default fund Fixed income Modeling and Simulation central counterparty (CCP) Risk Management (q-fin.RM) stress test Default Counterparty Business Finance Quantitative Finance - Risk Management Central counterparty (CCP) |
| Zdroj: | The journal of network theory in finance 4 (2018): 43–57. doi:10.21314/JNTF.2018.047 info:cnr-pdr/source/autori:Poce, Giulia; Cimini, Giulio; Gabrielli, Andrea; Zaccaria, Andrea; Baldacci, Giuditta; Polito, Marco; Rizzo, Mariangela; Sabatini, Silvia/titolo:What do central counterparty default funds really cover? A network-based stress test answer/doi:10.21314%2FJNTF.2018.047/rivista:The journal of network theory in finance (Print)/anno:2018/pagina_da:43/pagina_a:57/intervallo_pagine:43–57/volume:4 |
| DOI: | 10.48550/arxiv.1611.03782 |
| Popis: | In the last years, increasing efforts have been put into the development of effective stress tests to quantify the resilience of financial institutions. Here we propose a stress test methodology for central counterparties based on a network characterization of clearing members, whose links correspond to direct credits and debits. This network constitutes the ground for the propagation of financial distress: equity losses caused by an initial shock with both exogenous and endogenous components reverberate within the network and are amplified through credit and liquidity contagion channels. At the end of the dynamics, we determine the vulnerability of each clearing member, which represents its potential equity loss. We apply the proposed framework to the Fixed Income asset class of CC&G, the central counterparty operating in Italy whose main cleared securities are Italian Government Bonds. We consider two different scenarios: a distributed, plausible initial shock, as well as a shock corresponding to the cover 2 regulatory requirement (the simultaneous default of the two most exposed clearing members). Although the two situations lead to similar results after an unlimited reverberation of shocks on the network, the distress propagation is much more hasty in the latter case, with a large number of additional defaults triggered at early stages of the dynamics. Our results thus show that setting a default fund to cover insolvencies only on a cover 2 basis may not be adequate for taming systemic events, and only very conservative default funds, such as CC&G's one, can face total losses due to the shock propagation. Overall, our network-based stress test represents a refined tool for calibrating default fund amounts. |
| Databáze: | OpenAIRE |
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